Presentation on SEBI regulations for Bonus issue

BySiddharth

• A bonus share is a free share of stock given to current/existing shareholders in a company, based upon the number of shares that the shareholder already owns at the time of announcement of the bonus. While the issue of bonus shares increases the total number of shares issued and owned, it does not increase the value of the company..

• Whenever a company announces a bonus issue, it also announces a "Book Closure Date" which is a date on which the company will ideally temporarily close its books for fresh transfers of stock. Read "Book Closure" for a better understanding.

Advantages of issuing Bonus Shares

• Fund flow is not affected adversely.• Market value of company’s shares comes down

to their normal value by issue of bonus shares.• Market value of members shar eholding

increases with increases with the increase in number of shares in the company.

• Bonus shares is not an income. Hence not taxable income.

• Paid-up share capital increases with issue of bonus shares.

Impact on Ratios

The main financial effect of bonus share is that it increases the number of shares outstanding and reduces the earnings per share (EPS).

EPS = Net Profit after tax No. of equity shares outstanding As the profits remain the same and the number of

shares increases, the value of Earnings Per Share (EPS) will go down.In fact, the stock price should also go down proportionately to the number of new shares. But sometimes, in reality, the share prices may not go down, which gives more advantage to the share holder.

Conditions to be satisfied before issue of Bonus shares

• Bonus issue must be authorized by articles of the company.

• Bonus issue must be sanctioned by shareholders in general meeting on recommendation of Board of Directors of company.

• Regulation issued by SEBI must be complied with.• Authorized capital must be increased wherever

necessary

SEBI Regulation for Bonus Issue• No company shall, pending conversion of FCDs/PCDs, issue

any shares by way of bonus unless similar benefit is extended to the holders of such FCDs/PCDs, through reservation of shares in proportion to such convertible part of FCDs or PCDs.

• The bonus issue shall be made out of free reserves built out of the genuine profits or share premium collected in cash only.

• Reserves created by revaluation of fixed assets are not capitalized.

• Bonus issue not to be in lieu of dividend.• The bonus issue is not made unless the partly-paid shares,

if any existing, are made fully paid-up.

• The company should not have defaulted in payments of any interest or principal in respect of its fixed deposits, debt securities issued by it.

• The company should not have defaulted in payments of any statutory dues to the employees such as contribution to provident fund, gratuity, bonus.

• Implementation of proposal in 15 day• The Articles of Association of the company shall contain a

provision for capitalization of reserves, etc.• Consequent to the issue of Bonus shares if the subscribed

and paid-up capital exceed the authorized share capital, a Resolution shall be passed by the company at its general body meeting for increasing the authorized Capital.

• Famous Example of bonus issue of shares Reliance Power which got listed in stock exchange in year 2008. IPO price for retail investor was ₹430 but due to subsequent fall in stock market the company decided issued bonus share. The company decided to issue 3 bonus shares for every 5 shares held.

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